Share transfer transactions are a common way of acquiring and capitalizing businesses. This type of transactions can be materialized through onerous legal acts (E.g. Purchase and Sale) or free of charge (E.g. Donation). The importance of the subject transcends the commercial sphere and extends to the tax impact derived from this type of operations; the latter being the one on which we will focus in this article.
Tax applicable to the transfer of shares
According to the provisions of Article 15 of Law No. 822 “Ley de Concertación Tributaria” (LCT) and its amendments, the transfer of shares, whether for valuable consideration or free of charge, may generate a capital gain; this would be taxed by the Capital Gains Income Tax.
In other words, whenever a transfer of shares is intended, it is essential to confirm whether or not a capital gain has been generated according to the parameters regulated in the tax legislation. For such purposes, we must remember that capital gains consist of those positive variations in the value of the taxpayer’s assets, as a consequence of the disposal of assets, assignment or transfer of its rights.
The following question arises from the above: How can I calculate the capital gain that will be subject to Income Tax? The following is a brief explanation of the applicable procedure:
First, we must determine the taxable base of the tax; this varies according to the type of transaction:
Onerous acts: The difference between the acquisition cost of the share and the transfer value. Note: The transfer value must be at least equal to the market value of the shares being transferred. In the event that the agreed value is higher than the market value, the higher of these two values will be applicable.
Free acts: The capital gain corresponds to the total value of the transfer. Note: The value of the transfer will be equal to the market value of the shares.
Once we have defined the value of the capital gain, a definitive withholding tax with a 15% rate will be applicable. The withholding must be made by the buyer to the seller of the shares or, in the case of foreigners, it must be made by the company issuing the securities under a degree of joint and several liability.
What is the market value of the shares for tax purposes?
Unfortunately, our legislation does not establish a determined mechanism to calculate the market value in this type of transactions, therefore, it is necessary to fill this gap through calculation mechanisms of the mercantile practice.
In the absence of regulations on how to determine the market value, we use as a reference the accounting equity of the company (Assets – Liabilities). For the purposes of this exercise, we will use the last Balance Sheet of the company, in order to identify the assets, liabilities and current equity of the business entity; this allows us to calculate the equity value of each of the shares. It is important to point out that this is only one of several existing methods, ergo, in the event of an audit it is not possible to guarantee that the administrative authority will use the same criteria, since there is no clear regulation on this subject.
Tax supports for this type of transactions
According to current commercial and tax legislation, share transfer transactions are supported by the following documents and legal acts:
- The subscription of the purchase and sale agreement or donation (This may be in public instrument or private contract).
- The endorsement of the share certificates that are the object of the transaction.
- The registration of the new owners of the shares in the Share Registry
- Book of the company issuing the certificates.
- If applicable, according to the articles of incorporation and bylaws of the company, the waiver of preemptive rights by the remaining shareholders.
- The supporting payment documents.
- That the withholding taxes have been duly made, paid and declared to the tax authorities.
In summary, share transfer operations must always be duly analyzed by the tax advisors of the taxpayer, in order to determine the tax effects of each of these operations. Otherwise, the taxpayer would be exposed to adjustments for omitted taxes, fines for tax violations and late payment surcharges.